Example 1: (income statement format): The following revenue, expenses, gains, and losses of AZ Co.

for 2021 ($ in thousa

Sales revenue $ 2,435

Cost of goods sold 1,250
Selling, general, and administrative expenses 190
Interest expense 50
Gain on sale of investments 60
Tax rate 40%

In the space below, prepare an income statement for AZ that includes subtotals for gross profit, operating income, income
Lastly, calculate basic EPS. Assume the company did not issue any preferred dividends and that it had a weighted average o
shares. Hint: The formula to calculate basic EPS is:

AZ Co.
Income Statement
For the Year Ended December 31, 2021

Sales revenue
Cost of sold goods
Gross profit
Operating expense:
Selling general and administrative expenses (SG&A) 190
Total operating expenses
Operating income
Other income (expense):
Interest expense (50)
Gain on sale of investments 60
Total other income (expense), net
Income before income taxes
Income tax expense
Net Income

EPS-basic

Taxes are an essential expense reported separately ("disaggregated") on the income statement. Note that tax expense is b
taxable income, not on income shown on the income statement. You will learn how to calculate taxable income in your tax
courses. This class will calculate tax expense as a percentage of pretax income.

Example 2: Calculate the following ratios for AZ Corp. Additional necessary information has been provided below:

Total asset balance on January 1, 2021 $ 5,000

Total asset balance on December 3 1, 2021 6,000
Total stockholders' equity balance on January 1, 2021 2,000
Total stockholders' equity balance on December 31, 2021 2,500

Profit margins:
Gross margin percentage 48.67%
Operating margin percentage 40.86%
Profit margin on sales 24.76%

Returns:
Return on assets 10.96%
Return on equity 26.80%
sses of AZ Co. for 2021 ($ in thousands):

ss profit, operating income, income before income taxes, and net income.
and that it had a weighted average of common shares outstanding of 100

$ 2,435
1,250
1,185

190
995

10
1,005
402
$ 603

$ 6.03

atement. Note that tax expense is based on

calculate taxable income in your tax

n has been provided below:

Example 3: Calculate the income or (loss) from discontinued operations for cases A – D below.

Case A: Susie Q Corporation sold its Benjamin division in 2021. The Benjamin division reported an operating income (preta
assets was $25. Susie Q Corporation sold the division's assets for $30, net of its costs to sell the division. Susie Q Corporatio
should Susie Q Corporation report as income (loss) from the discontinued operation, net of tax?

Pretax operating income (loss)

Book value of assets
Sales price of assets, net of costs to sell
Tax rate

Sold or held-for-sale?
What do I need?

Income or loss from operations

Gain (loss) on sale of assets
Income or loss from discontinued operation, pretax
Tax expense (benefit)
Income from discontinued operation, net of tax

Case B: Annette Corporation sold its David division in 2021. The David division reported an operating loss (pretax) of $(40)
$10. Annette Corporation sold the division's assets for $20, net of its costs to sell. Annette Corporation has a tax rate of 15%
Corporation report as income (loss) from the discontinued operation, net of tax?

Pretax operating income (loss)

Book value of assets
Sales price of assets, net of costs to sell
Tax rate

Sold or held-for-sale?
What do I need?

Income or loss from operations

Gain (loss) on sale of assets
Income or loss from discontinued operation, pretax
Tax expense (benefit)
Income (loss) from discontinued operation, net of tax

Case C: In November 2021, Willow Corporation decided to sell its Shuggie division. As of December 31, 2021 (year-end), th
the Shuggie division reported a pretax loss from operations of $(4). On December 31, the division's assets had a book value
costs to sell, of $7. Willow Corporation has a tax rate of 25%. For what amount should Willow Corporation report as incom
net of tax?

Pretax operating income (loss)

Book value of assets
Fair value (net costs to sell) of assets
Tax rate

Sold or held-for-sale?
What do I need?

Income or loss from operations

Impairment loss
Income or loss from discontinued operation, pretax
Tax expense (benefit)
Income (loss) from discontinued operation, net of tax

Case D: In August 2021, Cersei Corporation decided to sell its Scarlett division. As of December 31, 2021 (year-end), the div
Scarlett division reported pretax income from operations of $5. On December 31, the division's assets had a book value of
costs to sell, of $12. Cersei Corporation has a tax rate of 30%. For what amount should Cersei Corporation report as income
net of tax?

Pretax operating income (loss)

Book value of assets
Fair value (net costs to sell) of assets
Tax rate

Sold or held-for-sale?
What do I need?

Income or loss from operations

Impairment loss
Income or loss from discontinued operation, pretax
Tax expense (benefit)
Income (loss) from discontinued operation, net of tax
m discontinued operations for cases A – D below.

sion in 2021. The Benjamin division reported an operating income (pretax) of $10 for 2021. The book value of its
ion's assets for $30, net of its costs to sell the division. Susie Q Corporation has a tax rate of 20%. For what amount
) from the discontinued operation, net of tax?

$ 10.00
25.00
30.00
20%

sold
income (loss) from operations AND gain/loss on sale

$ 10.00
$ 5.00
15.00
3.00
$ 12.00

n in 2021. The David division reported an operating loss (pretax) of $(40) for 2021. The book value of its assets was
s for $20, net of its costs to sell. Annette Corporation has a tax rate of 15%. For what amount should Annette
ontinued operation, net of tax?

$ (40)
10
20
15%

sold
income (loss) from operations AND gain/loss on sale

$ (40.00)
10.00
(30.00)
(4.50)
$ (25.50)

ecided to sell its Shuggie division. As of December 31, 2021 (year-end), the division had not yet sold. For the year,
perations of $(4). On December 31, the division's assets had a book value of $16 and a fair value, minus anticipated
ate of 25%. For what amount should Willow Corporation report as income (loss) from the discontinued operation,

$ (4)
16
7
 25%

hold for sale

income frlom oss from operations/impartment loss?

$ (4.00)
(9.00)
(13.00)
(3.25)
$ (9.75)

ed to sell its Scarlett division. As of December 31, 2021 (year-end), the division had not yet sold. For the year, the
erations of $5. On December 31, the division's assets had a book value of $3 and a fair value, minus anticipated
ate of 30%. For what amount should Cersei Corporation report as income (loss) from the discontinued operation,

$ 5
3
12
30%

held for sale

income from operations / impartment loss? no imperment loss, we are selling for more than the book value

$ 5.00
- we do not recognize gains, only imperment loss, because is hel for sale
5.00
1.50
$ 3.50
ore than the book value

ent loss, because is hel for sale

Example 4: At the end of the year, ZA Corp. completed the sale of its software business. The division's assets had
book value of the assets was $16 million. The loss from operations related to the software business was $7.2 mill
operations was $11.6 million. The income tax rate is 35%.

Calculate the income or loss from discontinued operations, net of tax and prepare the lower portion of ZA Corp's
pretax income from continuing operations.

Pretax operating income (loss) of division

Book value of assets
Sales price of assets, net of costs to sell
Pretax income from continuing operations
Tax rate

Sold or held-for-sale?
What do I need?

Income or loss from operations

Gain (or loss) on sale of assets
Income from discounte operations, PRETAX
Tax expense (benefit)

ZA Corp.
Income Statement (partial)
For the Year Ended December 31, 2021

Income from continuing operations before taxes

Income tax expense
Income from continuing operations
Income (loss) from discontinued operations, net of tax
Net Income
ompleted the sale of its software business. The division's assets had a net selling price of $20 million. The
loss from operations related to the software business was $7.2 million. Pretax income from continuing
rate is 35%.

d operations, net of tax and prepare the lower portion of ZA Corp's Income Statement, beginning with

$ (7.20)
16.00
20.00
11.60
35%

sold
operations income & gain or loss from sale

$ (7.20)
4.00
(3.20)
(1.12)
$ (2.08)

$ 11.60
4.06
7.54
(2.08)
$ 5.46